WASHINGTON (Reuters) — A recent slowdown in the growth of productivity of US workers has raised chances it has slipped from the lofty levels held since the mid-1990s, but economists are not ready to declare the boom over yet.Productivity growth is the primary source of a nation’s ability to raise living standards over time. It is especially crucial as baby boomers start to retire, because this will shrink the number of US workers relative to the dependents they must support.

Understanding changes in productivity — a gauge of how much any given worker can produce in an hour <\m> is also critical for managing monetary policy.

Productivity increased at just a 0.2 percent annual pace in the third quarter after a 1.2 percent second-quarter advance, a typical cyclical downtick as economic growth slowed.

However, accompanying declines in worker compensation have also increased the probability that long-term trend productivity growth has fallen as well, according to work done by economists at the New York Federal Reserve.

Economists James Kahn and Robert Rich have developed a model to peer through the volatility of quarterly productivity data to detect the underlying trend, which has charted three distinct phases since the Second World War.

From 1948 until 1973, US labour productivity grew at an annual pace around 3 percent. Between 1973 and 1996, it slumped to growth of just 1.3 percent. In 1996, it picked up again in a return to its pre-1973 rate.

But central bankers have had a hard time identifying a break in the trend until years after one has occurred, a difficulty that can have disastrous consequences if it leads them to set interest rates either too high or, as happened in the 1970s, much too low.

In the 1970s, the US central bank overestimated trend productivity growth and let the economy run too hot, stoking an inflation rate that exacted a high economic price as policy-makers fought to rein it in.

In contrast, then-Fed Chairman Alan Greenspan held off on raising interest rates as the economy began to boom in the mid-1990s, rightly guessing productivity growth had picked up.

Productivity and labour force growth are the two ingredients that combine to determine the economy’s non-inflationary growth potential. When productivity is higher, the economy can handle more stimulus without sparking inflation.

In an attempt to deliver a more timely signal of any shift in trend and cut down on the guess work, Kahn and Rich’s model uses current data to yield a statistical probability of whether the trend is still in the higher regime, or has downshifted to the lower pace of growth.

It works by incorporating measures of worker compensation and consumer spending alongside productivity, since economic theory says all three will move together over the long term.

Prior to a downward revision last week to the government’s measure of third-quarter compensation, the model had found only a tiny probability that trend productivity growth had slipped.

But the chances jumped on the revision.

“The probability of being in the low-growth regime jumped quite a bit, from around five percent up to around 23 percent,” Kahn said in a telephone interview.

“That sounds like a lot, but it still means, of course, that we are 77 percent likely still to be in the higher growth regime,” Kahn added.

Other economists felt the trend was probably also intact, although they granted that an ageing workforce would make itself felt on economic growth over the long term.

“Clearly there has been some slowdown in productivity growth for cyclical reasons,” said Kevin Kliesen at the St. Louis Federal Reserve.

“But the counter argument is that we’re still in the midst of a productivity boom and these booms can last from 10 to 25 years,” he said.

This confidence echoed Fed Chairman Ben Bernanke, who argued in August that the evidence pointed in this direction.

“A case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time,” he said in a speech in Greenville, South Carolina. “Whatever the pace of future technological progress, further diffusion of already existing technologies and applications to more firms and industries should continue to increase aggregate productivity for a time,” he said.